How to Minimize Retirement’s Hidden Costs

When I was a freshman in college, I took boxing classes. (It’s a long story.) One fight, in particular, stands out in my memory: A right hook I never saw coming left me flat on my back. (It’s fair to say I was no Mike Tyson in the ring. More of a Mr. Rogers. But I digress.)

The point here is that the punches you fail to anticipate are the ones that can do the most damage. That’s also true when it comes to retirement: The taxes, fees and outlays that catch you flat-footed are the ones that can jeopardize your financial future. Fortunately, there are steps you can take to keep from landing on the canvas, even in a shaky economy.

Start by recognizing the risks. (And more people are: In a recent Charles Schwab study, baby boomers said their biggest retirement-related concern was “unexpected expenses,” such as medical costs.) If you’re forced to make big withdrawals from savings in the teeth of a bear market, especially in the early years of retirement, your nest egg could expire before you do. You also have a good chance of living well into your 80s, and even your 90s. The upshot: more years with more bills (both planned and unplanned).

Ray Falkenberg, 68, uses the term “stealth expenses.” “I was pretty naive when I retired 10 years ago,” he told me recently from his home in Fresno, Calif. “There are a lot of hidden costs in retirement that people don’t recognize.” Here are a few big ones:

Replacement costs.

Eileen Sharkey, chairwoman of Sharkey, Howes & Javer, a financial-planning firm in Denver, says clients often buy a new car just before retiring, thinking that vehicle will see them through their final years. Her reply: There’s a good chance you’ll live long enough to buy several new cars. Big-ticket buys — a new furnace, updated appliances, a fresh coat of house paint — can put sizable dents in your nest egg. But most people don’t consider that such significant outlays can follow them into later life or that such costs can continue to add up for decades. Says Sharkey, “Many people still under-estimate their life expectancy, when, in fact, the 85-plus population is the fastest-growing in the country.”

Relatives in need.

You might already be feeling a financial pinch in caring for aging parents. But younger generations will likely come knocking on your door as well: an adult child who gets laid off or divorced, perhaps, or a grandchild who needs help with tuition. “I’m not sure I know any retiree in my age bracket that hasn’t experienced the need to provide some funds to parents or adult children,” says Henry “Bud” Hebeler, 78, who runs Analyzenow.com, a retirement-planning site.

Required distributions.

Most people know that after reaching age 70-1/2, they must begin withdrawing funds from tax-deferred accounts (like IRAs). What they fail to understand, says Falkenberg in California, are the ripple effects from those payouts. Required distributions can, first, push you into a higher tax bracket and, second, translate into increased Medicare Part B premiums (which are tied to annual income). Falkenberg estimates that, in his case, these particular stealth expenses could reduce his annual income by as much as 14 percent.

Health care inflation.

Of course, you’re probably calculating health care costs into your retirement budget. But chances are good, says Colleen O’Brien, a vice president at Charles Schwab, that you’re not accounting for inflation. Indeed, according to the Society of Actuaries, while overall U.S. inflation has averaged 3.5 percent a year over the past three decades, the figure has averaged 5.8 percent for medical care. Such increases are difficult to dodge or bargain your way out of: Medicare establishes what you pay for health care in retirement — and if you do get sick, you’ll likely want the best (read: most expensive) care available.

Of course, all of this raises the question: How do you avoid getting smacked with stealth expenses when you retire? Three things to keep in mind:

First, when budgeting for later life, look for tools and calculators that let you incorporate variables like maintenance costs and health care inflation. Hebeler’s site, Analyzenow.com, has some of the best software (most of it free) for doing just that. For example, his Replacement Budgeting program demonstrates a simple, effective way to set up a reserve account that can help pay for everything from carpets to car repairs.

Second, focus — financially — on the five years immediately preceding your planned retirement and the first five years of retirement itself. Individuals and couples who make a concerted effort to save and invest can build up almost one-third of their nest egg in the final five years before retiring, says Nancy Blunck, who heads Blunck Financial, a planning and asset-management firm in Anchorage, Alaska. Such an effort, needless to say, can put you in a better position to handle unexpected bills. Similarly, try to avoid major expenses (a new roof, a new car) in the first five years of retirement, the time when you and your nest egg are “most vulnerable to adverse market returns,” Blunck says.

Finally, keep saving in retirement. I am continually surprised at the number of people who — once they leave the office — believe their saving days are over. No, you probably can’t (and don’t need to) save as much as you did in the past. But emergencies don’t care that you’re retired — and stealth expenses are waiting behind any number of corners. Draw up, and continue to follow, a savings plan in later life. Ideally, you’ll be able to stay on your feet in the ring.

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